Japan Inc needs foreign managers to succeed in a globalizing world

Asset or liability? At Takeda Pharmaceutical, 11 of the top 14 executives including CEO Christophe Weber are non-Japanese. (Photo by Wataru Ito)

The global business media's response to the proposed $82 billion acquisition by Takeda Pharmaceutical, the Japanese group, of Ireland's Shire has been, at best, mixed.

A common theme is that the business case has not been proven. Critics are particularly concerned about the impact of the acquisition on Takeda's balance sheet and the danger posed by a rise in interest rates given the large debt involved.

A group of dissident Takeda shareholders, including members of the 237-year-old drug maker's founding family, has joined the protests criticizing the deal as "the height of madness."

However, while it is totally reasonable to criticize the proposed transaction because the business case does not add up, some influential Japanese media outlets have reported on a different, more disturbing, narrative.

They focus on the fact that the CEO of Takeda is a Frenchman, Christophe Weber, who joined the group in 2014 from the British pharmaceutical company, Glaxo SmithKlein. These critics point out that, including Weber, of the top 14 executives, only three are Japanese.

In addition to populating the top management with foreigners, Weber has provoked comment for taking action to accelerate the company's globalization, such as sending large numbers of Takeda Japanese R&D executives to work in the U.S. In February, he quietly resigned from his position as vice chairman of the Japanese Pharmaceutical Association and appointed a Japanese Takeda director as his replacement, breaking a long tradition that the position be reserved for CEOs or chairmen. "It's because he has no interest in Japan," the Nikkei newspaper quoted a senior Takeda manager as saying. The Yomiuri newspaper quoted an influential retired Takeda executive as saying of the transaction: "With foreigners managing the company, if the headquarters move overseas, you could hardly call it a Japanese company any more."

As I recall, the remarks echo much Japanese media coverage of Renault, the French group, taking control of Nissan Motor in the late 1990s, and Carlos Ghosn assuming the position of CEO. The consensus was "how can a foreigner possibly run a Japanese automotive firm...it will all end in tears."

This has been a recurrent theme when a non-Japanese CEO has taken the helm of a Japanese company. At Takeda, when Weber became CEO in 2014, the Japanese press highlighted a petition signed by 110 former executives, including members of the Takeda family, appealing to shareholders to reject the appointment on the grounds that a non-Japanese should not run a Japanese company in existence since the Edo era.

Given that foreignness is perceived as such a handicap in leading a Japanese group it is not surprising that non-Japanese managers would be reluctant to expose themselves to such high risk of failure. Only in the face of a massive challenge, when no viable alternatives seem available, would a Japanese company itself consider such a drastic option.

The existence of a sturdy glass ceiling for foreign employees at Japanese companies is well known. In 2001, there were only 232 foreign directors out of a total of around 40,000 directors of listed Japanese companies. Ten years later, in 2011, during a period when the need to globalize Japanese companies had become the focus of so much attention, the number of foreign directors had only increased by 15 to 247. In 2016, the number passed 350. That is still under 1%: even if you limit the number to Nikkei 225 companies, the percentage only goes up to 2.5%.

This compares unfavorably to France, where 35% of directors of companies in the CAC 40 index are non-French, and the U.K., where the figure is 31% for non-British directors of FTSE 100 companies. The number of non-Japanese in senior executive positions, particularly in head office, is also minuscule.

Yes, language is an issue. But this cannot be used forever as a reason for excluding talented non-Japanese from management roles at Japanese groups. Why would an ambitious young Indian, Chinese, European or indeed any non-Japanese graduate want to join a Japanese company when the corridor to the top becomes so narrow?

There is general agreement in Japanese industry that the future for Japanese pharmaceutical makers is bleak. With patents expiring causing a shrinking drug pipeline, a falling domestic population, strong downward pressure on domestic drug prices, companies must look overseas for pipeline replenishment and for markets if they are to survive. The idea that it is unnatural to choose non-Japanese leaders to help transform Japanese companies to make them more competitive globally is baffling.

Some Japanese groups have truly gone global with their management. Japan Tobacco, for example, now has an overseas business considerably larger than its domestic operations and is run from Switzerland by an almost entirely non-Japanese management.

Sony, the electronics and entertainment group, has located the leadership of key businesses outside Japan. Its film business has long been headquartered in Los Angeles; in 2016, the company also moved its gaming business to California, given the importance of the U.S. in the creation and consumption of digital content. Sony Music's headquarters are located in New York. The group has implemented global talent management systems which identify future leaders regardless of nationality to try to create a level playing field for employees to reach top management.

In pharmaceuticals, as well as Takeda, the other three of the top four groups, all have non-Japanese in the position of Chief Medical officer or head of R&D. Two, Astellas and Eisai, have multiple non-Japanese in their top executive teams. Those who point the finger at Weber for being a foreigner are not only missing the point about globalization, they are out of date.

A few Japanese companies, such as Rakuten, First Retailing, Honda Motor and Bridgestone have either made English the official company language or have concrete plans to do so. Still more are making English proficiency a condition of promotion above certain ranks. Many are pushing Japanese expats to tough overseas assignments much earlier in their careers.

We are even seeing some non-Japanese employees join as graduates alongside Japanese graduates on April 1 (when almost all Japanese graduates start with their new companies). But the pace of change is still painfully slow.

Most Japanese companies still see it as a huge challenge to incorporate non-Japanese into the rigid community-oriented employment system that still emphasises long-term employment and slow promotion, even if these practices have modified somewhat in the past decade. There is no clear career track for non-Japanese employees and few companies have a talent pool data base which features non-Japanese employees on an equal basis with Japanese.

It is certainly true that many Japanese groups such as Toyota Motor have become dominant in their respective industries while not compromising their strong Japanese identity. These companies have become global leaders by leveraging the strengths that accrue from the Japanese employment system, particularly their ability to diffuse tacit knowledge. Japan Inc must clearly continue to nurture the talents and careers of its core Japanese staff.

However even at groups such as Toyota, there appears to be realization that reliance on Japanese expatriates to manage increasingly complex global operations is reaching its limits. At Toyota, the appearance of non-Japanese in the senior management ranks and on the board, the large investment in the Toyota Research Institute located in Silicon Valley (a subsidiary of which is now spearheading Toyota's autonomous driving charge) and headed by an American, all demonstrate a recognition that the company is changing.

Although Weber needs to be careful to balance respect of Takeda's Japanese heritage with globalizing the top management team, the company must embrace the internationalization of its management ranks if it is to succeed outside Japan and integrate its business successfully with non-Japanese companies.

This applies to all Japanese CEOs who want to meet the challenges of globalization. Truly sustainable competitive advantage will only be achieved when Japanese companies are able fully to embrace non-Japanese employees and leverage their diverse strengths.

George Olcott is a guest professor at Keio University and has 10 years' experience serving on the boards of listed Japanese companies.